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Wednesday, May 16, 2012

BEAR MARKET OR BULL OPPORTUNITY?

Bears have had a number of reasons to stand tall
lately since many recent developments that should have been bullish for gold
haven’t been. But, even as prices have continued to fall, there are those who
suggest that while bears may believe they are taking control, smart investors
should be taking advantage of the opportunities.

Given the heightened
levels of uncertainty and threat of turmoil in the Eurozone, gold should be
raking in bundles of safe haven cash, but that isn’t happening. Instead, safety
seekers are flocking to the dollar even as the US fails to harness its spending
and its economic data loses some of the shine that was seen in the first
quarter.

Followers of the
market are well aware that gold had become addicted to loose monetary policy.
The dependence has become so extreme that drastic price fluctuations can result
from the mere suggestion of action or disappointment at the lack of such
suggestions.

But this weekend,
following weaker-than-expected data in April, which the markets interpreted as
further proof of a slowdown, China slashed its reserve rate ratio. In doing so,
banks, which now need to hold less cash, have more freedom to douse it on the
public; however, the gold market has not taken notice.

“Welcome to the ‘new’
normal…where the perception that China is experiencing a worrisome deceleration
supersedes the possible benefits of an accomodative stance by the government,”wrote Jon
Nadler, Kitco Senior Metals Analyst.

India, which is a key
market for gold, is displayingbearishattitudes through its
lack of demand for the metal. The marriage and festive season has passed,
international markets are sending negative cues about gold, and compounding
these problems is the fact that even with falling prices the metal is
still relatively expensive when purchased with volatile rupees. At R28,540 per
10 grams, an ounce of gold on Tuesday would cost over $1,650, about $100 more
than in New York.

As if that isn’t
enough ammunition for the bears, they can also celebrate the the gut-wrenching
drop in gold prices.

Scotiabank said that
while on the downside, it will become increasingly bullish as each support
level is breached. Those levels, said the bank in its May metalsreport, are at $1,630,
$1,623, $1,614, and $1,612. Gold has crashed through all of those levels,
giving up all of its gains for the year. Tuesday, the metalhitthe lowest levels seen since December 29.

Gold
the commodity

Gold is now trading as
a commodity. In this environment, bullish sentiment is drying up and fund
managers have been exiting the market for weeks. Last month, gold Eagle sales
saw a sharp decline. And last week Barclays Capitalcutits forecast for gold
by eight percent to $1,716, citing recent price declines and the slowdown in
demand from India and China.

Though bearish tones
may be growing louder, not everyone is convinced that gold is set to crash and
burn. Nor is everyone ready to cash out and move to the sidelines.

Central banks are
expected to stay in the market. Last year theypurchased440 tons of gold.
Scotiabank is expecting this trend to continue as governments and sovereign
wealth funds look to diversify away from fiat money.

“This should help to
underpin confidence in bullion and in turn keep investor interest active,
especially into price dips,” the bank said.

If central bankers’
attitudes are similar to those held last year, they should find the current
price weakness very encouraging; in 2011 price declines often served as buying
opportunities.

ETF investors, whether
they are aware of it or not, are considered sticky money. In April, there was a
trickle of outflows from these holdings. However, for the most part, ETF
investors have lived up their moniker despite the downtrend of gold prices.

While it is certainly
not an event worthy of champagne, investors added 2 tons to ETFs last week,
which made them net buyers for the first time in a month. This occurrence came
in the midst of a risk-off environment that by comparison sawsilverETF investors drop about 76 tons.

There is still a
notable amount of optimism towards gold, though it may not get a lot of airtime
at the moment.

Legendary investor Jim
Rogers recentlysaidthat he is still bullish on gold, and that the
the pullback in prices creates a value buying opportunity. A number of
professionaltraderscontinue to hold their ground and see long-run
opportunity in the market.

Even though Scotiabank
noted that a fall below the aforementioned technical levels is bearish, it also
added that moves below $1,550 may well turn into spikes.

“We believe that
getting bearish on gold at current levels (c.$1,560) would be wrong and too late,”
says a marketnotefrom Standard Bank.
“In fact, we believe that from a risk/return perspective, gold should be
bought, not sold, on dips lower than this.”